Marginal Utility Analysis

A goods is desired as it gives the consumer satisfaction or utility. Utility is the want satisfying power of a goods. It is a subjective entity. Utility is ethically neutral like liquor and drugs may satisfy need of a section of a society but they are socially immoral.

Assumptions of the Marginal Utility Theory

The marginal utility analysis was developed by Marshall on the basis of certain assumptions.

(1)     Utility is a cardinal concept - This implies that utility is measurable and quantifiable. Money is regarded by Marshall as the measuring rod of utility. the price which each consumer is willing. to pay for each unit of a good rather than go without it is the measure of utility it derives from that good.

(2)     Rationality - A consumer is rational as he tries to maximise his satisfaction subject to the constraint posed by his budget or limited income.

(3)     Constancy of marginal utility of money - The marginal utility of money remains constant throughout when the individual is spending money on a good,

(4)     Utility is additive - The utility derived from the consumption of good X, Y and Z depends on their consumption i.e., U_x,=f (Q_x), U_y = f (Q_y) and U_z, = f (Q_z). The total utility function now is: U = U_x, + U_y + U_z. Thus, total utility is the sum of independent utilities derived by an individual from the consumption of different goods. 

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